A Crucial Link In The Sovereign Debt Cycle Keeping Spain Alive Is Breaking

Spokesmen from Spain’s two largest banks—Santander and BBVA—both said yesterday that they have already exceeded the limit of domestic government debt feasible for them to hold on their balance sheets, according to El Confidencial (Spanish).

“This does not signify that we’ve lost confidence in Spain. We maintain general confidence and we feel quite comfortable, but there are policies of risk that impose limits on the exposure to countries and stocks, and in this case we have surpassed them,” said BBVA financial director Manuel González Cid.

Domestic banks have been the primary purchasers of government debt this year, after two three-year long-term refinancing operations allowed them to borrow cash from the European Central Bank at low rates and with ever more flexible collateral.

But the refusal of these banks to purchase more such debt would indicate that the Spanish government may face increasing difficulties in funding public spending. It constitutes an important break in the feedback loop that’s been keeping Spanish borrowing costs down all year.

Still, Spain does not likely face an immediate funding crisis. El Confidencial notes that Spanish bank Sabadell says it is still disposed towards debt purchases, and most analysts agree that the banking sector has sufficient resources to complete nearly €50 billion in debt it still wishes to issue this year.

This is, however, an early sign that the LTROs’ effects have been fleeting.

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